The Dangers Average Investors Face When Buying IPOs

Written by: Mike Valles

Putting your hard-earned money into buying IPOs may mean that you are going to experience a loss, at least if you are rather inexperienced in it. There are many factors that need to be considered before you are apt to make a profit, but the risk for loss may be even greater.

In an article at CrossWalk.com, reprinted from the World Finance Net IPO Newsletter, Irv McGraw says that it is likely that when average people start buying IPOs, that they are not apt to make any money. There are some exceptions of course, but these are rare. One main reason for a likely loss is that 76 percent of IPOs fail to perform as expected. Another reason, says the Wall Street Journal, is because the gap between the share price and the Net Asset Value (NAV) will usually widen quickly after the IPO.

Why Companies May Decide to Go Public with IPOs

There are several reasons why a company may decide to go public, and it is not necessarily because they are sure that they will succeed. Instead, it could be that they need to raise some money to go to the next level, perform more research, or even to further develop a new product. In some cases, there may be no real way to evaluate the worth of an IPO because it may not yet even have any real profit or a product ready to market.

Technology IPOS May Be More Unpredictable than Others

One industry that has the potential power to see tremendous profit is a technology IPO. People look at this type of industry as being both sexy and interesting, largely because of some of the unique items it has to bring to the market, says MoneyMorning.com. While this can make it attractive to a large group of people, also partly because of what some technology offerings have been able to do in the past, it needs to be realized that new products are as yet unproven as to their public performance.

Reducing Risk When Buying IPOs

Surrounding any offering of an IPO will always be a good degree of hype and marketing. It’s a good idea to just ignore it – and who is saying it – because you can be sure it is hype designed to raise the apparent value of the IPO.

Richard Satran at Money.USNews.com says that you need to look at the growth potential before investing. Facebook, for instance, had already experienced tremendous growth, and its potential for future growth was limited. Unfortunately, too many people failed to realize this. He suggests that companies worth about $200 million are a good choice.

Alternatives to Investing in Single IPOS

An alternative to investing in an IPO, says Richard, is to invest in IPO funds. Like a market fund, the risk is spread over several IPOs, reducing your risk often seen when you put all your eggs in one basket. He also says that in a fund like this, most of the weaker companies get screened out, helping to ensure that your investment is more secure.

Investing in an IPO should only be done after you have carefully learned the tips and things to watch out for. Your level of safety rises if you select a manager that is experienced in dealing successfully with buying IPOs, and is able to guide you through it.


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